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Bitcoin: A Joke or the Real Thing?

11/30/2013

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COMMODITIES CORNER

Bitcoin has crossed the $1,000 barrier. Bitcoin is a virtual, decentralized currency that circumvents government regulation. It was the subject of two Senate hearings last week, and Fed chairman Ben Bernanke said virtual currencies "may hold long-term promise."

By Philip Springer


The FBI recently shut down Silk Road, an online marketplace where sellers offered drugs, firearms and other illicit goods and services, taking Bitcoins as payment.

Bitcoin's advocates aim to make it a universal electronic currency. By a wide margin, Bitcoin is the best known among dozens of alternatives, collectively known as altcoins. PeerCoin, Litecoin and Anoncoin are some other altcoins.

Probably the main reason for the Bitcoin buzz is its soaring value. A year ago, Bitcoin was worth a few dollars. In November alone, the price has climbed from $215 to $1,000 on Mt. Gox, the leading altcoin exchange. Meanwhile, Bitcoins were trading for $950 on Bitstamp, the second most popular exchange, and for $915 on BTC-e.

The supply of Bitcoins recently stood at 12 million, worth about $12 billion at recent prices.

SecondMarket's Bitcoin Trust "invests" in Bitcoins. SecondMarket is an online security brokerage specializing in illiquid assets. And at least one mutual fund is in the works.

Bitcoin is actually both a digital currency and a payment system. To get Bitcoins, you have to first set up a "wallet," probably online at a site such as Blockchain.info. You then pay a willing seller the necessary hard currency to transfer the coins into that wallet.

A growing number and variety of US merchants are starting to accept Bitcoins as payment.

The Silk Road closing highlighted a key Bitcoin attribute: theoretical user anonymity, which enables secret transactions of various kinds. A network keeps track of all transactions made using Bitcoins but it doesn't know who is using them or for what, just the computer "wallet" IDs. Yet every transaction is publicly available for anyone to examine in the "blockchain," a global, permanent ledger.

Strangely, the government of China evidently has endorsed the use of Bitcoin. Some say it's because of the hope that digital money will undermine the dollar's status as the world's reserve currency. A subsidiary of Baidu Inc. (NSDQ: BIDU), China's top search engine, started to accept Bitcoins last month.

Bitcoin supporters contend that it some day could become an effective alternative to government currencies or a cheap way to move money around the world.

But Bitcoin's manic price movements undermine its credibility as a currency. Real currencies usually have relatively stable values, making them good units of exchange. And Bitcoin already has numerous competitors.

In addition, the Bitcoin system evidently isn't completely secure. Numerous thefts of Bitcoins from encrypted accounts have been reported. These inevitably will grow in number with Bitcoin's popularity and, for now, value.

Bitcoin itself was invented in 2008 by one or more computer programmers using the pseudonym Satoshi Nakamoto. His, her or their identity is still unknown.

Altcoin values are set partly through complicated mathematical algorithms and partly by what people think they should be worth at any time.

Bitcoins are created, or "mined," by rewarding computer operators who solve a mathematical algorithm that grows increasingly difficult, which in turn slows the supply growth of Bitcoins. An algorithm limits the total number of Bitcoins ever mined to 21 million units, which is expected to occur by 2140.

It is extremely likely that governments ultimately will aim to regulate Bitcoin if its market gets big enough. Money is a tool of the state. Governments will not allow creation of an independent world currency outside of their control.

Meanwhile, it seems that the main reason people are willing to pay rising prices for Bitcoin is because other people also are willing to. Just like the Dutch tulip mania of the 17th century, probably the biggest financial bubble of all time.

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One of the Best-Looking Trades In The Market Right Now

11/27/2013

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I think I am finally joining Marc Faber and Warren Buffet's stance on precious metals; although platinum and palladium are still great buys and far below the cost of extraction.
COMMODITIES CORNER

I'm still tasting the sour results from the obviously manipulated gold market debacle. I had to maintenance over $80 grand on margin not to mention holding the bag on hundreds of shares of various gold royalty companies. I liquidated most of the dead weight but held onto three companies. I finally shed Harmony Gold (ADR) and rid myself of Seabridge Gold (SEA.TSE) prematurely. I recaptured 44% and made up the difference in Lionbridge Technologies (LIOX) and Diebold (DBD); two securities I have discussed and recommended before. LIOX is up 58% since my recommendation and DBD is up 15.7%.

By Jeff Clark 

It's either a massively stupid idea, or it's brilliant. Buying gold looks like a good trade right here, right now. 
I'm still wearing a black eye from my call for a huge gold-stock rally earlier this month. But that's not going to stop me from jumping back in the ring and taking a few more punches. The potential prize money is too big to ignore. Stop rolling your eyes and stay with me here for a minute while I explain the thinking...
 
There's an obvious contrarian trade here. Gold has underperformed the market this year. It has disappointed investors for so long that only the most diehard gold bugs are still onboard. Most investors have jumped ship and are sailing away with the stock market instead. Nearly every article I read this past weekend on gold predicted the metal would soon be trading at $1,000 or even $800 per ounce.
 
Sentiment just doesn't get much more bearish than that. So anyone looking to "buy low" has to be looking at gold right now.
 
There's also a "reversion to the mean" trade developing. After falling for 11 of the past 12 trading days, gold's proverbial rubber band is stretched far to the downside. Even a quick bounce just to alleviate the extreme oversold condition could be good for a fast move up toward $1,300 or so. That's a good trade. 
But what I like best right now is the setup on the weekly chart.
 
Take a look... Gold has support at the point of its late-June low at about $1,210 per ounce. Yes, gold dipped as low as about $1,170 in June. But this is a weekly chart. The data points are plotted based on the price at the end of the week. So $1,210 is our support level.
 
The red arrows on the chart below show the MACD indicator buy and sell signalsover the past two years. There's no need to get too complicated here. MACD is a simple momentum indicator. Buy signals occur when the black line crosses over the red line. Sell signals happen when the black line crosses beneath the red line.
 
As you can see, the weekly MACD indicator gave three signals last year. While they didn't pick the exact turning points in the price of gold, all the signals were profitable. 
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We've only gotten one signal off this chart this year – a buy signal in July, when the black line on the MACD indicator crossed above the red line. That happened when gold was trading at about $1,320 per ounce.
 
So far, that signal is unprofitable. Gold is trading lower today than it was back then. But that's what gives us a favorable setup for a long trade in gold.
 
There's support at $1,210 per ounce. So traders buying here around $1,240 can stop out of the trade on a break of that support. That'll limit the risk to just over $30 per ounce. But we can use the MACD indicator to give us an even tighter stop loss on the trade.
 
Notice how the black line on the MACD indicator is just barely holding above the red line. The black line is either going to curl up from here – which can only happen if the price of gold rises – or it's going to immediately drop below the red line and generate a sell signal.
 
Traders can buy gold here in anticipation of higher prices. And they can stop out of the trade for a small loss if – at the end of the week – the black line on the MACD indicator is below the red line.
 
No matter what you may think of gold at the moment in terms of risk versus reward, this is one of the best-looking trades in the market right now.
 
Best regards and good trading,
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